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Guarantee or Indemnity- does it matter which you have signed?

This is part of an occasional series of articles concerning personal guarantees.

Typically, a company opens up an account with a supplier and the directors sign something to say that if the company does not pay then the directors will do so personally.

Like so much in business it can get complicated and if there are thousands at stake legal advice is worthwhile.

A Guarantee is a contract by the director to be responsible for the debt or default of the company who is principally liable to the party to whom the guarantee is given.

An Indemnity is a contract by the director to keep a party indemnified “harmless” from any loss incurred that they might incur from entering into a transaction with the company.

Often we see guarantees and indemnities combined, which is allowed.

The distinctions between a guarantee and an indemnity are subtle but they can be important.

  • A guarantee must be in writing to have effect. An indemnity does not have to be in writing.
  • A guarantee is discharged if the principal contract is void or unenforceable. An indemnity usually remains even if the principal contract is void.
  • Liability under a guarantee co-exists with the principal’s liability. Not so for an indemnifier.
  • Variations of the principal contract (extensions of time, increases in credit) can result in a guarantee being discharged. Indemnities are not usually discharged.

Guarantees and Indemnities are difficult to challenge but merely using the words “Guarantee” or “Indemnity” does not make the document binding and impregnable.

Call Bruce Pasetti if you have an issue to discuss 07 3152 4402